The Outsourcing Activities of Honeywell International Inc - Case Study Example

Executive Summary Honeywell is a business and technology world leader manufacturing aerospace and control products, power generation systems, industrial chemicals and materials competing with Eaton, GE and Pratt & Whitney among others. The company is based in Morristown, New Jersey, USA and is listed in the New York Stock Exchange and is one of the thirty companies benchmarked in the Dow Jones Industrial Average. It posted $27.65 billion in US dollars as revenues for 2005 or an 8% revenue growth for the year (Yahoo Finance, 2006). The company’s operations are include Honeywell Aerospace, Automation and Control, Specialty Materials and its Transportation Systems which provides consumer car care products which include Prestone, FRAM. The largest of these divisions is Honeywell Aerospace which produces aircraft components, engines, avionics for commercial airlines, business and regional aircrafts and spacecrafts (Honeywell International, Inc., 2006). One of the key issues the company is dealing with today is outsourcing its business and operations. The trend of outsourcing has not been limited to the company but has been indicative of the current trends in almost all industries to cut operations costs. According to Honeywell, its outsourcing is part of its competitive strategy: "As a global technology leader, we must participate in the worldwide economy and open new markets for our products and services, while continuing to recruit and retain a competitive and talented global work force, The result will be a company that stays ahead of the curve; focuses on meeting the needs of our customers; provides challenging opportunities for our employees and sustains growth over the long-term for shareholders." (Frauenheim, 2004). Purpose and Methodologies The purpose of this study is to evaluate the outsourcing activities of Honeywell International Inc. and to assess the impact of these activities to the company, the industry and the national economy. This is to recognize that the outsourcing or off-shoring policies of a company, especially one of Honeywell’s magnitude influences industries and markets. A study of company, competitor and global outsourcing trends will be utilized. Literature based on industry trends will be compared to global indicators and will be used to approximate the bearing of Honeywell’s outsourcing activities. A SWOT Matrix will be used to illustrate prevailing trends as well as developments that will reflect Honeywell’s long term policies and standpoint on outsourcing. Information and Data China and Mexico have been chosen by Honeywell since the 1980’s for some of its manufacturing operations. Following new global trends, it has extended its outsourcing activities to its software development. Outsourcing to India of the company’s commercial and residential security systems began in 1998 and it is now evaluating further outsourcing of its aviation and aerospace operations. Analyzing the external and internal factors that affect and affected by Honeywell’s outsourcing activities shows that like all strategies it has its strengths, weaknesses, opportunities threats, and trends: Strengths Honeywell was able to reduce its technical manpower costs by 75-90% and overall labor costs was decreased by 50% (Mattiuzzi, 2002). Honeywell was able to establish its presence in key development regions, particularly India and China. Distribution channels for products, technology and services were developed in Europe and Asia. Honeywell was able to focus on its core competency and provide competitive services (Greble, 2005) Increased capacity has allowed the company to acquire strategic and long term alliances, partnerships contracts with IBM and BT. Weakness Outsourcing has created tension among the company’s local employees. The employees have cited the company’s outsourcing activities to infringe on employee benefits and rights (Greble, 2005; Frauenheim, 2004). The company needs to develop a communication infrastructure that will cater to the needs that the intensification of outsourcing is demanding to facilitate operations and coordination. Supply channels have yet to be developed for optimum offshore operations. The level of development in host countries has been variably satisfying and suited to company’s needs (Tubbs & Schulz, 2006). Corporate infrastructure and procedures to deal with host country’ laws, culture and politics have to developed and institutionalized. These will be critical in developing localized strategies for operations (Bergsten, 2000). Opportunities Liberalization on trade and foreign direct investments allows for greater development in international markets Development of international technology hubs is creating market and industry opportunities Support for outsourcing activities are being developed significantly in the field of telecommunications and logistics Standardization of trade and industry across the globe is being developed through the global trade organization, trade agreements and establishment of ISO’s The inclusion of multinational perspective into existing business operations allows for greater input and sensitivity to markets. Threats Many similarly scaled companies are also using the outsourcing who have more experience in the method Extraterritorial politics and economies protectionist or regulatory prerogatives to multinational companies Development of negative sentiment of multinational expansion from host countries at the same time negative impressions on local job markets Limited lobbying power with foreign governments. Hazard of emerging local competition form beneficiaries of technological transfer brought by operations Economic effects of manpower outsourcing to local economies Trends Cost will remain to be an important consideration and motivation in outsourcing companies are now seeing outsourcing as a means to be able to focus more on the core competencies of their operations (Prabhakara, 2005) Knowledge Process Outsourcing (KPO) will develop as a major outsourcing trend specially in technically equipped locations such as India Companies turning to outsourcing will prefer going into multiple outsourcing contracts rather that single ones, specializing outsource contracts (Prabhakara, 2005). Outsourcing locations will not be limited to developed or industrialized centers for host countries. Smaller cities and towns will also become prime locations for outsourcing activists. The trend has already been apparent in NCR Delhi, Mumbai, Bangalore, Pune, Hyderabad and Chennai in India and Cebu and Davao in the Philippines. Increased IT spending will still be a major trend across all industries particularly those that are intensifying offshore operations in developing countries (Prabhakara, 2005). KPO outsourcing will aim to gain specific domain expertise while multi-service BPO will strategize to increase value chain of services and products by the developing and providing more business facilities and assistance for their clients Data Analysis Outsourcing has shown that it is definitely at pace with globalization. The liberalization or economies does not only open trade and industrial markets but the labor market as well. A company such as Honeywell will naturally look for cost optimization labor and production cost is usually the area of concern. Honeywell’s motives are to optimize its operations as well as to access the best service at the most cost-effective price. But because Honeywell is such a substantial organization and a major employer, their business decisions have greater effects to the industry as well as the economy. Global Effects Honeywell offshore operations have been successful in cutting costs, developing international channels and establishing the company overseas. Yes, many companies have been outsourcing strategic activities for years but the recent trends in Honeywell’s outsourcing strategies have highlighted that beyond the cost benefits is the advantage of focusing on core competencies and developing corporate competitiveness. The decrease in costs has allowed companies to divert the resources to other activities such as research and development. Core business and productivity can be focused on more versus having to deal with as intensively production, service and logistics. Outsourcing has also eased the need to deal with directly local issues, policies, economics and labor concerns as service providers are to deal with such issues. Quality of services or products also becomes the liability of the service provider. The demands for development of services also becomes the service provider concerns allowing companies to concentrating technologies that directly concern their business versus support or non-essential technologies or services too. However, it has had also its problems. Outsourcing has created new economic trends that are becoming increasingly areas of concerns. In the US, there is already a significant decrease in IT unemployment and significant discrepancies between market labor industries that have been most active in outsourcing (Tubbs and Schulz, 2006) Industrial Effects The concept of outsourcing is not limited to off shoring. Honeywell has also outsourced with IBM, BT and Steria. According to Adams (2002), Honeywell estimates the global value of component repair and overhaul outsourcing at $3.2 billion in 2002 and a four to five percent increase in airline operations outsourcing in the next five years which creates $7.9 billion by 2005. According to George Marks, Software Technical Lead for Honeywell International in Folsom, small to medium companies in the will not likely outsource to other countries because of communication and coordination costs. He also says that there is also a limitation on what jobs can be outsourced especially if contracts are of national security or strategically sensitive (Mattiuzzi, 2002). Jim Wardrup, Hewlett-Packard (HP) Director of Strategic Initiatives and Global Influencers says that: "Because of the cost-reduction emphasis, there are a lot of people that have made claims that a particular service should be outsourced. Now there is a movement toward trying to benchmark what costs have actually been reduced and what improvement in productivity has actually occurred by doing that.” (Goolsby, 2003) Local Effects The most significant impact of the outsourcing that Honeywell has done to its operations is the increase in profit and optimization of operations. Coupled with the corporate leadership of management, it has been able to benefit form the lower labor costs, expertise and overall development that outsourcing has given way to. However, there are also having been negative effects. Its outsourcing activities have gained criticism because it has been seen as the company’s effort to mitigate labor benefits for employees. The courts have favored with Honeywell because they were able to prove that benefits package presented by the outsourcing company was similar in value of the benefits package Honey well provided the before the outsourcing, it is still indicative of the negativity that has been associated with outsourcing (Greble, 2006). The real concern rises from the perception of the company as employer. Though outsourcing is a viable option for key business operations, there are some jobs that will require local employees. If being employed at Honeywell becomes unattractive for the local employees then Honeywell will suffer from labor shortages in its core operations. The outsourcing also can discourage the pursuance of careers in fields that are being outsourced. In the long run, this may be a more costly problem for Honeywell. Conclusions It has to be accepted that outsourcing is part and parcel of globalization and is a scenario that companies have to deal with. Companies have to realize that beyond the actual the direct effects of outsourcing are consequences that influence local labor markets and industrial levels that have to be considered. Honeywell’s outsourcing strategies have proved to be effective and competitive. Though its coordination, logistics and communications still need to be developed, it is already establishing itself as a leader in this industrial and global trend. References Adams, Charlotte (2002). Avionics Aftermarket Services: A Buyer’s Market. Aviation Today April 2002. Retrieved on September 20, 2006 from http://www.aviationtoday.com/cgi/av/show_mag.cgi?pub=av&mon=0402&file=0402maintenance.htm Bergsten, C. F. (2000) The Global Trading System and the Developing Countries in 2000. Working Paper 99-6 Institute for International Economics. Retrieved on September 20, 2006 from http://www.iie.com/publications/wp/wp.cfm?ResearchID=135 Bradford, Robert W., Duncan, J. Peter, Tracy, Brian (2000). Simplified Strategic Planning: A No-Nonsense Guide for Busy People Who Want Results Fast!. Worcester, MA: Chandler House Press. Frauenheim, Ed (2004). Group Accuses Honeywell of Planning to Export Jobs. CNET New Online 7 December 2004. Retrieved on September 20, 2006 from http://news.com.com/Group+accuses+Honeywell+of+planning+to+export+jobs/2100-1022_3-5481698.html The Five Most Likely Outsourcing Trends of 2006 (2006). Newswire Today, January 9, 2006. Retrieved on September 20, 2006 http://www.newswiretoday.com/news/2852/ Greble, Thomas G. (2005). Avoid the Litigation Headache. Outsourcing Today. Retrieved on September 20, 2006 from http://www.hrotoday.com/Magazine.asp?artID=929 Goolsby, Kathleen (2003). What You Need to Know About IT Outsourcing Trends for 2003. Outsourcing Information Technology Center Online January 2003. Retrieved on September 20, 2006 from http://www.outsourcing-information-technology.com/trends2003.html Honeywell International, Inc. (2006). Our History. Retrieved on September 20, 2006 from http://www.honeywell.com/sites/honeywell/ourhistory.htm. Hoos, J. (2000) Globalization, Multinational Corporations and Economics. Kiado: Budapest. Mattiuzzi, Cici (2002). High Tech Jobs Leaving the Country. Retrieved on September 20, 2006 from http://www.ecs.csus.edu/career/articles/article11.html> Prabhakara, C.S. (2005). Outsourcing Trends for 2005. Retrieved on September 20, 2006 from http://www.chillibreeze.com/articles/OutsourcingTrendsFor2005.asp Tubbs, S. L. and Schulz, E. (2006) Exploring a Taxonomy of Global Leadership Competencies and Meta-competencies. The Journal of American Academy of Business, Volume 8, Number 2, March 2006, Dissertation Paper presented at the Eastern Michigan University. Eastern Michigan University: Michigan. Yahoo Finance (2006). Honeywell International Inc. Company Profile. Retrieved on September 20, 2006 from http://biz.yahoo.com/ic/10/10062.html. Read More